RRSP (Registered Retirement Savings Plan) is a well-known means of retirement savings for Canadians. However, many are not familiar with the term RSP which could stand for either Registered Savings Plan or Retirement Savings Plan. While all of them are vehicles for savings, and some people even use the abbreviations interchangeably, it is important to note that while RRSP is a type of RSP, not all RSPs are RRSPs.
While an RSP could be referring to an RRSP, RDSP (Registered Disability Savings Plan) and RESP(Registered Education Savings Plan) are also types of RSPs. Read below to find out the type of registered savings plans and retirement savings plans available to Canadians.
A Registered Savings Plan is essentially a savings plan which is registered with the CRA (Canada Revenue Agency) for it to qualify for the tax benefits it offers. It may or may not be a retirement savings plan. The main types of Registered Savings Plans available in Canada are:
|Tax-Free Savings Account (TFSA)
|You can contribute $6,000 to a Tax-Free Savings Account every year, and any income earned by the plan is tax-free.
|Registered Retirement Savings Plan (RRSP)
|A popular way of saving for retirement is the Registered Retirement Savings Plan. You can contribute up to 18% of your income (up to a limit) to the plan and avoid paying taxes on it and its earnings till you withdraw the money. RRSP can be converted to a Registered Retirement Income Fund (RRIF) on retirement.
|Registered Education Savings Plan (RESP)
|You can save for your child’s higher education through a Registered Education Savings Plan. By investing in such a plan, you can also receive annual grants from the federal and provincial governments. The earnings of the plan have little to no tax implications.
|Registered Disability Savings Plan (RDSP)
|Registered Disability Savings Plan is a long-term savings plan that is meant to support a person with disability (who are approved for disability tax credit) to save for their future. You can also receive grants from the government to support the savings goals when you open an RDSP.
Retirement Savings Plan is a term used to define any savings plan that is meant to provide you with an income in your retirement. There are several plans that can come under the umbrella of RSP.
The most common of them are RRSP and TFSA which are discussed above. An RRSP can be converted to a Registered Retirement Income Fund (RRIF) to provide you a regular income when you retire. Apart from these, your employer may also provide the option of a Registered Pension Plan (RPP). Another option that is available only to employees whose employment falls under federal jurisdiction, and to Canadians employed or self-employed in Yukon, Northwest Territories and Nunavut is the Pooled Registered Pension Plan (PRPP).
Registered Retirement Income Fund (RRIF): RRIF is opposite of what RRSP is. Before retirement, you deposit money into the RRSP every year, and after retirement, you can withdraw money from your RRIF every year. You cannot make any contributions to the fund once it is established and only withdrawals can be made.
RRIF has a minimum annual withdrawal amount which is set every year based on your age and the amount available in the fund. However, there is no maximum withdrawal limit. As in RRSP, you choose what type of investments are held in the RRIF and do not pay any taxes on the amount in the plan and its earnings as long as the amount is held in the plan. You do however have to pay taxes on the amount you withdraw from the plan.
Registered Pension Plan (RPP): A Registered Pension Plan is an arrangement where an employer makes full or partial contributions to a pension plan on your behalf, which is meant to support you in your retirement.
Both you and your employer can seek income tax deduction for your contribution to the RPP. It is also noteworthy that contributions to the RPP are counted against your RRSP contribution room through Pension Adjustment (PA). If your employer is contributing towards an RPP on your behalf, you could seek information from them regarding making withdrawals, early retirement and other pertinent topics.
Pooled Registered Pension Plan (PRPP): A Pooled Registered Pension Plan is a new kind of savings plan that is meant for those who don’t already have a workplace savings plan. This is available only to employees whose employment falls under the federal jurisdiction, or to those who are employed or self-employed in the Northern Territories – Yukon, Northwest Territories and Nunavut.
The advantage of a PRPP is that the individual assets are pooled and thus the administration costs are lower. The plan is administered by a licensed corporation resident in Canada and the contributions made to the plan are counted against your RRSP contribution room.
RRSP is the most commonly known savings vehicle to save for retirement. RRSP contributions are tax deductible, which means you don’t have to pay taxes on the amount you contribute towards your RRSP. Every year, you can contribute up to 18% of your income (up to a limit) to an RRSP without having to pay taxes on it in that year. However, the tax is not exempt but is deferred, which means you have to pay taxes when you withdraw from your RRSP.
RRSP investments can be in different forms, which can be low or high risk. The following are common types of RRSPs:
|Cash that is parked in a savings account to earn interest or cash that you transfer to a broker for investment but is yet to be invested.
|Mutual Funds and ETFs
|These are different types of investment funds. While mutual funds pool money from multiple investors to buy securities including stocks, bonds or even other mutual funds; ETFs also pool investor resources, the difference is that ETFs trade on a stock market.
|Government Bonds and Corporate Bonds
|These are again low risk investments wherein the investor loans a certain amount of money in the form of government bonds or corporate bonds and are paid a fixed interest on the same.
|Guaranteed Investment Certificates (GICs)
|An investment option offered by financial institutions that allows you to earn a guaranteed rate of return over a fixed period of time. Check out the best GIC Rates available in Canada.
|You could trade securities including stocks listed on a stock exchange through a trading account.
If you exhaust your limit for contribution to the TFSA and RRSP, you could still save more for your retirement through non-registered investment accounts. In any case, the amount you save through your TFSA and RRSP may not be sufficient for your post retirement expenses, and it is always better to save and invest more while you are earning.
You can open investment accounts through brokerages and start trading in bank stocks, dividend stocks, Exchange Traded Funds (ETFs) and more. Non-Registered accounts do not give you any tax shelter like the registered accounts do. You do not get any tax deductions for your contributions to such accounts and may also have to pay taxes on the earnings of the account. However, they are also free from limitations that come with registered accounts.
RRSP is tax-deductible, which means that your contribution is deducted from your taxable income for the tax year. However, the tax is deferred and not exempted, which means you have to pay taxes when you make withdrawals.
RRSP is a type of both Registered Savings Plan (RSP) and Retirement Savings Plan (RSP), which are both a category of accounts. There are different types of Registered Savings Plans and Retirement Savings Plans available to Canadians. The advantage of RRSP is that it is tax deferred, which means you don’t pay taxes on your contributions, you pay taxes when you withdraw the contributions.
You can withdraw from your RRSP before retiring, however, these withdrawals are subject to withholding tax, that your financial institution withholds; and if the amount withheld is not enough to account for the tax you owe as per your tax bracket, you may also have to pay additional income tax for your withdrawal. The RRSP matures on the last day of the calendar year in which you turn 71 and you need to make compulsory withdrawals after that. RRSP can be withdrawn in three ways on maturity:
You can withdraw from your RRSP before maturity and without having to pay tax only if you need it to pay for your first home under the Home Buyers Plan (HBP) or if you need it to continue your education under the Lifelong Learning Plan (LLP). These withdrawals however need to be repaid over a period of 15 years.